"In this section, we will cover one of the most basic things that you will need to know when trading forex, or for that matter any type of financial markets. A price chart basically shows what price a security is trading and at what point in time. You might have heard about technical analysis in forex. Well, technical analysis basically depends on reading the price chart and studying it. Therefore, you should have a good understanding of a price chart in order to be able to trade successfully in the forex markets. In this article, we will show you the basics of reading and understanding a price chart. We will also introduce you to the concepts of the various types of price charts that are available and how you understand the time series. By the end of this article, you should have a good understanding of reading a price chart and know what price is telling you."
A price chart is one of the most basic things that you will come across when you are trading forex. It is like a map for you. Therefore, it is important that you first have an understanding of the concept of reading the forex price chart.
The concepts are very simple, so do not get too overly concerned.
The Forex Price Chart
A forex price chart is basically a graph that has the x-axis and the y-axis.
On the x-axis, the time is plotted while on the y-axis, the price is plotted. As price continues to unfold, you will find that new bars or candlesticks are formed on the right side of the chart. The price you see on the left side of the chart is basically the historical price.
Depending on what charting platform you use, you can find that sometimes price is plotted on the left side of the y-axis and in some cases, price is plotted on the right side of the y-axis. And at times you will find price showing up on both sides of the y-axis.
This is perfectly fine. The first picture below gives you an example of the price chart.
Example of a Forex price chart
On the x-axis you can see that the values plotted are basically months of the year. On the right side, the y-axis shows the price levels. On the top left hand side is where you can see the timeframe of the chart you are looking at.
In the above example, you are looking at a daily time frame chart.
The above price chart format is the most common type of price chart format that you will come across.
Types of price charts
There are three main types of price charts that are used when you want to analyze the markets. These are:
- Bar charts
- Line charts
- Candlestick charts
Types of price charts
In the above example, you can see the three main types of price charts. Starting from the left, you have the bar chart, while the middle chart is the line chart and the chart to the right is the candlestick chart.
You might find these chart types to be different, but they are basically the same. The difference is the way how they depict the prices.
The general convention is as follows:
Bar chart is made up of vertical lines. On the left side, you will find a small vertical line pointing to the left. This depicts the opening price of the session. The bar’s high and low shows you the high and low prices of that session. Finally, the small horizontal bar pointing to the right is the closing price.
The line chart is the simplest of all charts. It simply plots the closing price of the session. You will notice that with a line chart, there are no high and low prices. There is also no opening price. The line chart continuously plots the closing prices for the session only.
Finally, the candlestick charts are the most unique. Here, you will find that the candlestick chart has a body. The color of this can change depending on whether price closed higher or lower than the open. The small points that protrude from the body are known as wicks. These wicks which are formed on top and at bottom signal the session’s high and low prices.
Using each of the price charts traders can analyze the markets slightly differently. However, the bottom line remains the same. There is no right chart pattern that you can use. It is a matter of personal choice.
Time in price chart
We mentioned that the x-axis plots the time series. Depending on the time frame that you are using, these time series can change. For example, if you are using a daily chart, then the time series unit is one day.
Now if you switch to a one-hour chart time frame, then the time series changes to 60-minutes or one hour unit of time.
The chart below shows an example of this. On the left side you have the one-hour chart time frame, while on the daily time frame you have the daily session.
Chart Time Series
You will now notice that the candlesticks look a bit different. That is because the daily chart takes into account the day’s activity. Whereas, when you look to the one-hour chart, it represents the one-hour activity over the course of the day.
If the above topics seem a bit confusing for you, do not worry too much. In the later parts of the series, we will take a detailed look into how you can understand price charts even further.